The writer, chief global strategist of Morgan Stanley Investment Management, is the author of “The Ten Rules of Successful Nations”
After their worst decade since the 1930s, emerging stock markets continued to underperform as a group in 2021, deepening the isolation that surrounds this sprawling asset class. It will therefore come as a surprise to many that eight of the top 10 and 13 of the top 20 performing markets of 2021 are in the developing world.
How can this add up? Given its size, China dragged down the emerging market index. With Beijing cracking down on its big tech companies and isolating itself in the name of economic autonomy, the country’s stocks have been hammered. China was the second worst performing market in the world last year, ranking 58th out of 59, just ahead of Pakistan.
Each region lagged the US as investors poured money into US tech giants. But, excluding China, emerging markets rose 10%, in line with returns from the rest of the world outside the US. This may portend a quiet return.
Money tends to flow to the fastest growing economies, especially those that are falling away from the pack. Emerging economies grew more than five percentage points faster than developed economies at the height of their boom in 2009. That lead had shrunk to one point by 2020, largely explaining a dismal decade for markets. emerging fellows.
Last year, however, signs of recovery outside of China began to appear, driven by rising commodity prices, the manufacturing strength of a few countries, the rapid growth of the digital economy and relative conservatism. finance of emerging world leaders. In 2021, commodity prices saw their biggest annual rise in nearly half a century, boosting exporters. Among the 20 hottest markets were the major oil powers, including Saudi Arabia in ninth place and Russia in 19th, up 20% on the year.
Although manufacturing is in decline globally, it remains an important source of growth in a few emerging countries, which are gaining ground as factories leave China in search of lower operating costs. Also among the 2021 hot markets were manufacturing powerhouses led by the Czech Republic in 2nd place, Vietnam in 15th and Mexico in 18th.
In the 2010s, an era of de-globalization saw the slowing of flows of people, money and trade, alongside a continued explosion of data flows, which are growing fastest in emerging countries. Among the top 20 stock markets that have benefited from the ongoing digital revolution are Taiwan in 13th place and India in 14th.
Despite these signs of recovery, many commentators fear that the central bank’s plans to slow the pace of monetary stimulus could trigger a withdrawal of risk, including from emerging markets, as happened during the taper tantrum. of 2013. But there are big differences today.
Global investors have pulled money out of emerging markets in most years since 2013, reducing the threat of capital flight. Over the same period, most major emerging markets have become more financially stable, not less. Currencies are more competitively priced. Foreign exchange reserves are greater. Most of the major emerging countries have avoided the cardinal risk: borrowing massively abroad. Current account balances, which reflect the amount countries need to borrow abroad to finance their purchases, have turned into surpluses.
Discussions of emerging market vulnerability now focus on rising average debt levels, but these averages again skew reality, distorted by China. After the 2008 financial crisis, China absorbed 70% of all emerging country debt; this share rose to more than 80% during the pandemic.
In most other major emerging countries, households and businesses have barely taken on debt, and governments have accumulated it less dramatically than their peers in China. Since 2019, total debt, which includes government, corporate and household debt, has increased by more than 24% as a percentage of GDP in China – well above the median for emerging markets and two to four times the increase in India, Indonesia, Mexico, Egypt or South Africa.
The global media tends to dwell on troubled cases like Turkey, but markets seem to be feeling the broader movement towards relative financial stability in many large emerging countries. Although economists often lag behind, they too expect emerging countries to begin to restore their growth lead over developed countries in the coming years, according to consensus forecasts.
If the fundamentals that drive commodities, manufacturing, data flows and economic reform hold, 2021 could be remembered as the year the emerging markets comeback began, even if it wasn’t widely recognized at the time.